zhengzaishuru
Baytex Energy’s (NYSE:BTE) Q3 2023 results were in line with expectations and it generated CAD$158 million (US$117 million) in free cash flow during the quarter. It also updated its Q4 2023 guidance (with no major surprises there) and I now project it to generate around CAD$325 million (US$241 million) in Q4 2023 free cash flow.
Baytex’s free cash flow should increase in Q4 2023 due to lower capex and higher production than in Q3 2023, as Q4 2023 production benefits from wells that came online during Q3 2023.
Although Baytex’s operational performance has been in line with my expectations, I have reduced my estimated value for Baytex from US$5.50 per share in my September look at the company to a new estimate of US$5.00 per share.
In September I had expected US$426 million in 2H 2023 free cash flow from Baytex. My current expectations are for US$358 million in 2H 2023 free cash flow, with lower oil prices accounting for most of the difference. Baytex’s oil hedges don’t provide protection until WTI oil prices fall below US$60.
In addition to the change in 2H 2023 free cash flow projections, I have also reduced Baytex’s 2024 free cash flow projections due to the oil strip for 2024 going down from $80 in early September to around $73 to $74 now. Reduced near-term free cash flow accounts for around US$0.30 of the reduction in Baytex’s estimated value.
As well, Baytex is involved in a Canadian tax dispute where it may eventually owe over US$300 million in tax (and interest) payments. This dispute isn’t expected to be finally resolved for multiple years, but I hadn’t previously accounted for that potential payment in Baytex’s value. This reduces my estimate of Baytex’s value by around US$0.20 per share.
This report uses US dollars unless otherwise indicated, as well as an exchange rate of US$1.00 to CAD$1.35.
Viking Asset Sale
Baytex recently entered into an agreement to sell some of its Viking assets in southwest Saskatchewan. These assets are located at Forgan and Plato, which are in the southeastern part of Baytex’s Saskatchewan Viking assets.
Baytex will receive CAD$153.8 million (US$113.9 million) for its divestiture, subject to purchase price adjustments. The divestiture is expected to close by the end of 2023, while the effective date of the transaction is October 1, 2023.
These assets are currently producing 4,000 BOEPD (100% light and medium oil). There haven’t been other details provided about the divestiture, but given the relatively modest price (US$28,500 per flowing barrel of oil), the assets likely had high operating costs and/or a high decline rate, as well as being a lower priority for development than Baytex’s other assets.
Canadian Tax Issues
Baytex also announced that some of its subsidiaries received a notice from the Appeals Division of the Canada Revenue Agency [CRA] that denied CAD$591 million (US$438 million) in non-capital loss deductions for the 2011 to 2014 period.
This dispute has been ongoing since 2016, and Baytex is now planning on filing an appeal to the Tax Court of Canada. The CRA claims that Baytex owes a total of CAD$415.5 million (US$307.8 million). This consists of taxes owing of CAD$244.8 million (US$181.3 million), late payment interest of CAD$166.6 million (US$123.4 million) and a late filing penalty related to 2011 in the amount of CAD$4.1 million (US$3.0 million).
Baytex is not required to pay anything while this is being appealed, although the late payment interest will keep accruing in the meantime. Baytex believes that the Tax Court of Canada appeal could take up to three years to be resolved and any appeals of the Tax Court of Canada’s ruling could take another two or more years to be resolved.
Thus this dispute may not be finally settled until 2028 or 2029. This has no near-term impact on Baytex but should be noted as an item that may affect Baytex down the road.
Baytex mentioned that it remains confident that the original tax filings are correct and that it has received advice from its tax advisors that it should be entitled to use the relevant deductions. I have trimmed Baytex’s value by around half of the potential payments to be more conservative though.
Q3 2023 Results
Baytex ended up with 150,600 BOEPD in production in Q3 2023 and expects approximately 158,000 to 160,000 BOEPD in production in Q4 2023. This is largely in line with Baytex’s previous guidance where it expected 153,000 to 157,000 BOEPD in 2H 2023 production. Baytex now expects 154,300 to 155,300 in 2H 2023 production based on its Q3 2023 actuals and Q4 2023 guidance.
Baytex also expects a total of CAD$631 million in 2H 2023 exploration and development expenses now, compared to its prior guidance range of CAD$601 million to CAD$641 million.
Baytex generated CAD$158 million (US$117 million) in free cash flow in Q3 2023 but should generate significantly more in Q4 2023 due to reduced capex and higher production levels.
Baytex previously indicated that it expected around CAD$400 million (US$296 million) in Q4 2023 free cash flow. That was based on Q4 2023 strip prices as of early November. Due to the decrease in commodity prices since then, I’d now expect Baytex to generate around CAD$325 million (US$241 million) in Q4 2023 free cash flow.
A significant portion of that free cash flow is expected to go towards share repurchases, as Baytex reported repurchasing 16.8 million shares in Q3 2023, followed by over 10 million more shares in Q4 2023 (up to early November).
Baytex reported having approximately 845 million shares outstanding at the end of Q3 2023, so may repurchase around 3% of its outstanding shares during Q4 2023.
Notes On Valuation
I previously valued Baytex at approximately US$5.50 per share at long-term US$75 WTI oil, but am now reducing its estimated value to CAD$6.75 (US$5.00) per share.
I am keeping my estimate of long-term oil prices unchanged at this time, despite the current weakness in oil prices. However, my past estimate of Baytex’s value assumed strip prices (which included $80 oil in 2024) until the end of 2024, followed by $75 WTI oil after that point. I am now modeling results based on flat $75 WTI oil for 2024 and beyond.
The reduction in projected free cash flow due to weaker 2024 (and Q4 2023) oil prices trims Baytex’s value a bit. As well, I’ve also factored in some potential negative future impacts from Baytex’s Canadian tax dispute.
Conclusion
Baytex Energy’s operational performance has been solid, and it is now projected to generate approximately CAD$325 million (US$241 million) in Q4 2023 free cash flow. This is still down a bit from previous expectations of around CAD$400 million (US$296 million) in Q4 2023 free cash flow due to weaker commodity prices. As well, the current strip for 2024 WTI is now in the mid-$70s compared to $80 when I looked at Baytex in early September.
Baytex is also involved in a Canadian tax dispute that could cost it over US$300 million, although this dispute isn’t expected to be resolved for multiple years.
Between the lowered expectations for near-term free cash flow and the potential hit from the tax payments, I am lowering my estimate of Baytex’s value to CAD$6.75 (US$5.00) per share. This is US$0.50 per share less than my previous estimate of Baytex’s value.
